Industry Should Move to a New Architecture for Payments, Says BoE's Chris Salmon

In a speech delivered at the BAFT-IFSA Global Annual Meeting in London on 24 January 2012, Chris Salmon, executive director for banking services and chief cashier, Bank of England, described how the financial crisis has influenced the perspective of financial stability policymakers towards payment operations. He argued that this will impact upon banks in two main ways: first, authorities are likely to place more attention on the overall network of payment operations within a financial system; and second, in the context of resolution plans, authorities are likely to ask more questions about the internal organisation of firms’ operations.

Salmon concluded by encouraging those in the transactions banking world to consider the attitudes of financial stability authorities and the broader regulatory back-drop when developing their medium-term planning.

In terms of the overall network, Salmon focused on the pattern of direct and indirect participation in payment systems and highlights some of the risks of systems which have a disproportionately high level of indirect participation.

Following comments from a speech in July, Salmon reiterated the BoE’s view that an increase in direct participation in CHAPS would be good for UK financial stability. He provides an update on the bank’s work to achieve this including the fact that one large indirect participant has formally committed to join and a second is moving towards a similar formal decision. “If all the banks we have talked to in this round of discussions were to join CHAPS…payment flows made by indirect participants would account for less than 40% of the total, making substantial inroads into our tiering problem.” Salmon also outlined a number of other ways in which the overall payment systems network could be made more robust.

Salmon went on to consider the impact of the work of the Financial Stability Board (FSB) on the orderly resolution of financial institutions on the payments world. Salmon believes it is unlikely that the internal organisation of payments will be unaffected as and when large firms address the organisational issues which the FSB has identified. Resolution authorities will also want to understand how customers will be able to continue making and receiving payments following a resolution.